21 Explanatory Notes on Segment Reporting

The Group’s segment reporting is in line with the internal organizational and reporting structure. WACKER reports on four operating segments (Silicones, Polymers, Biosolutions and Polysilicon), which are organized and managed autonomously on the basis of the type of products they offer and their different risk and income structures. For a detailed description of the segments’ products and organization, please refer to the Management Report. Business segments are not combined. Any activities or results not assigned to an operating segment are shown under “Other,” including the result from the investment in Siltronic. Foreign currency gains and losses are also shown under “Other.”

Items in the statement of financial position and statement of income are assigned to the operating segments in accordance with economic power. Assets used jointly by several segments are generally shown under “Other” if they cannot be assigned clearly to a particular segment. A similar approach is adopted for external financing. The carrying amount of the strategic investment in Siltronic, which is accounted for using the equity method, is also recognized under “Other.” For the geographical regions, the assets and liabilities are assigned in accordance with where the respective Group company’s site is located. Sales are classified in accordance with both the customer’s location and the respective Group company’s site. The income from, and the carrying amount of, the equity-accounted investment in Siltronic were assigned to the region “Germany.”

WACKER measures the segments’ success using the segment profitability variable EBITDA. EBITDA is calculated by adjusting EBIT for depreciation and amortization, impairments, and write-ups. EBIT consists of the gross profit from sales, selling and general administrative expenses, research and development expenses, and other operating income and expenses, including income from investments in joint ventures and associates and other income from investments.

Asset additions, depreciation, amortization and reversals of impairment losses refer to intangible assets, to property, plant and equipment, to investment property and to financial assets. Internal sales show the sales that are generated between the segments. They are settled mainly on the basis of market prices or the planned cost of sales. Segment information is based on the same presentation and accounting methods used for the consolidated financial statements. Receivables and liabilities, provisions, income, expenses, and results between the segments are eliminated in the course of consolidation.

Generally, the assets reported for the segments encompass all of their assets. Loans, cash and cash equivalents, and deferred tax assets, however, are allocated to the “Other” segment.

The liabilities shown for the segments represent all of their liabilities – except deferred tax liabilities, which are shown under “Other.” The Group’s financial liabilities are allocated to individual segments in proportion to the segment assets. Provisions for pensions are allocated in accordance with Group personnel ratios. Advance payments received are allocated directly to the individual segments.

Non-cash expenses and income are divided up between the individual segments as follows:

The decline in both advance payments received for polysilicon deliveries and advance payments retained due to the termination of polysilicon contracts amounted to €43.1 million (versus €71.7 million in the prior year). The increase of €1.3 million (versus a decrease of €0.5 million) was attributable to the Biosolutions segment. The “Other” segment grew by €3.3 million in the year under review.

Important valuation changes not recognized through profit or loss concern changes in the market value of derivative financial instruments (cash flow hedging) and changes in value from the remeasurement of defined benefit pension plans.

Changes in the market value of derivative financial instruments from cash flow hedging were attributable to WACKER SILICONES, at €4.6 million (after €0.0 million in the prior year) and to the “Other” segment, at €-7.5 million (after €8.4 million). A change of €-6.0 million (after €5.5 million) in derivative financial instruments from the investment in Siltronic was also recognized under “Other.”

The changes in value due to the remeasurement of defined benefit plans are allocated to the segments as follows:

Changes in Value from the Remeasurement of Defined Benefit Pension Plans

€ million

2018

2017

SILICONES

-36.9

27.0

POLYMERS

-12.7

9.8

BIOSOLUTIONS

-3.8

2.4

POLYSILICON

-22.5

18.2

Other

-73.4

69.8

Total

-149.3

127.2

In addition to Germany, the USA and China are the only countries in which WACKER generates significant sales from a Group standpoint. Measured in relation to the headquarters of the selling unit, sales amounted to €660.2 million in the USA (after €627.2 million in the previous year) and €517.4 million in China (after €455.1 million). Measured by the customer location in the USA and China, the respective sales generated were €670.4 million (after €652.1 million) and €940.9 million (versus €1,044.9 million). WACKER has no major customer whose sales it is obliged to disclose.

The reconciliation of the segments’ aggregate results with the net income for the year is shown in the following list:

General term used to describe compounds of organic molecules and silicon. According to their areas of application, silicones can be classified as fluids, resins or rubber grades. Silicones are characterized by a myriad of outstanding properties. Typical areas of application include construction, the electrical and electronics industries, shipping and transportation, textiles and paper coatings.

Polymer

A polymer is a large molecule made up of smaller molecular units (monomers). It contains between 10,000 and 100,000 monomers. Polymers can be long or ball-shaped.

Polysilicon

Hyperpure polycrystalline silicon from WACKER POLYSILICON is used for manufacturing wafers for the electronics and solar industries. To produce it, metallurgical-grade silicon is converted into liquid trichlorosilane, highly distilled and deposited in hyperpure form at 1,000 ° C.

EBITDA

Earnings before interest, taxes, depreciation and amortization.

EBIT

Earnings before interest and taxes: EBIT is a good indicator for comparing companies’ profitability, since it is widely used across the corporate world.

Cash Flow

Cash flow represents the movement of cash and cash equivalents into or out of a business activity during a finite period. Net cash flow is the sum of cash flow from operating activities (excluding changes in advance payments received) and cash flow from long-term investing activities (before securities), including additions due to finance leases.